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The Smoking Gun Of Spain's Unsustainability

Tyler Durden's picture




 

Authored by Michael Cembalest, JPMorgan CIO,

The Spanish Prisoner: why the adjustment in Spain looks like it will eventually fail

The people of Spain are prisoners of an economic adjustment that looks like something dreamed up by Torquemada. Let me explain. I was discussing Spain with a colleague, and I mentioned the ongoing collapse in Spanish labor compensation.

 

He cheerfully connected the compensation decline with an improvement in Spain’s competitiveness, and offered the improvement in Spain’s trade balance as proof. A lot of the recent compensation decline had to do with public sector workers (who export nothing) and not private sector ones, but let’s assume he’s right that private sector wages are impacted as well. Is this a sustainable way to regain competitiveness? Historically, balance of payments crises brought on by competitiveness gaps were almost always addressed in part through currency devaluation, as shown in the table. Let’s go to the archives.

The 2008-2012 recovery in Spain’s trade balance didn’t happen as quickly as the other episodes, but at least the gap closed, right? Not so fast. Spain’s exports have been growing, but its recovery is the worst of the bunch, indicating that trade improvement relies heavily on an import collapse and 25%+ unemployment. The last chart is the smoking gun: the growth dynamics of the current Spanish adjustment are nothing short of terrible in an historical context.

 

One could also look the collapse in capital spending in Spain, down at a 28% annual rate in Q4 2012 even when excluding construction. Did inflation spike in prior episodes after devaluation? Yes, but real GDP measures improvement after taking inflation into account, which is why the last chart tells you most of what you need to know. Torquemada the Inquisitor would be impressed with the pain that Spain is inflicting on itself. The bad news for Spanish labor markets isn’t over: most measures of Spanish competitiveness show that only half the gap has been closed vs Germany. I don’t see how this can be sustained indefinitely, even with the rally in Spanish sovereign and bank spreads, and with looser fiscal policy sanctioned by the EU. Without a true fiscal transfer union in Europe, caveat emptor in its Periphery, unless prices for stocks, bank loans and real estate are sufficiently cheap.

Full cembalest letter

 

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Wed, 03/06/2013 - 18:11 | 3306350 LawsofPhysics
LawsofPhysics's picture

Please.  Humanity isn't just another unsustainable ponzi, it's the unsustainable ponzi.  Plenty of consumers for all these goods etc.  The problem is everyone is fucking broke.

Wed, 03/06/2013 - 18:18 | 3306376 kaiserhoff
kaiserhoff's picture

He makes a sound point about devaluation.

Crazy as it seems, I know people buying Spanish real estate, but only in the most desirable areas.  Some foreign buying is probably the only short term help that market will get.  A devaluation makes it rational to buy, and will make the current flippers look like the fools they are.

Wed, 03/06/2013 - 18:24 | 3306397 LawsofPhysics
LawsofPhysics's picture

Fair enough, but in order to actually do anything, like have a vibrant economy, you need energy.  Just getting up in the morning and keeping a single heart beating requires energy.  energy costs are not devaluing any time soon.  Do these locations have vibrant economies, will they when the unemployment rate for the 20-35 crowd is 50%?  Seems kind of stupid to buy property unless you want a front seat for the civil unrest.

Wed, 03/06/2013 - 18:38 | 3306449 WayBehind
WayBehind's picture

"25%+ unemployment."

Are you saying 75% of Spaniards is actually working? That is surprising even more. Viva Siesta! 

Wed, 03/06/2013 - 19:27 | 3306657 TheGardener
TheGardener's picture

"getting up in the morning" Good one. Merkel could have said that.

A vibrant economy in an agreeable climate is another misnomer. Get real, this is about Spain for Christ`s sake!

Wed, 03/06/2013 - 18:24 | 3306399 knukles
knukles's picture

I am Jack's complete lack of surprise.  What utility provides any further evidence of doom?

Wed, 03/06/2013 - 21:35 | 3307131 TeMpTeK
TeMpTeK's picture

When the whole EU is broke... theres always Microsoft

http://www.reuters.com/article/2013/03/07/us-eu-microsoft-idUSBRE9250052...

Wed, 03/06/2013 - 18:14 | 3306361 Stuck on Zero
Stuck on Zero's picture

... and death has been shown to have a beneficial effect in reducing high-blood pressure.

 

Wed, 03/06/2013 - 18:15 | 3306367 dark_star
dark_star's picture

I have just watched Wall Street (the movie).  It's all in there.  Greed is good.  Oliver Stone KNOWS it.  If it was so predictable then, as I assume it is now, then what is the problem?  My point being, life goes on.  You guys with guns & gold, your fear is for nothing.  The ponzi continues, into the sunset...

Wed, 03/06/2013 - 18:16 | 3306370 LawsofPhysics
LawsofPhysics's picture

...until the supply lines break.  The we get a real reset and a new ponzi is born.  History is very clear on this.

Wed, 03/06/2013 - 18:30 | 3306422 ebworthen
ebworthen's picture

"History of Western Civilization:  A Handbook"

http://www.amazon.com/History-Western-Civilization-William-McNeill/dp/02...

Wed, 03/06/2013 - 18:19 | 3306379 TruthInSunshine
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Paul Krugman just tweeted that "Spain should spend massively more of what they don't have, and never stop."

Wed, 03/06/2013 - 18:23 | 3306393 suckerfishzilla
suckerfishzilla's picture

I can feel their pain. 

Wed, 03/06/2013 - 18:26 | 3306406 davidsmith
davidsmith's picture

Dont' worry.  The Spanish generals will make the necessary correction.  Who is the general most likely to take over, readers?

Wed, 03/06/2013 - 18:28 | 3306413 Vegetius
Vegetius's picture

The lies will continue until the end there is no other way, they know its doomed but the Micawber defence is strong in them "something will turn up"

“The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over.”
? Joseph Goebbels

Let us remember that the Real Man who dreamed up the EU was none other then Herr Goebbels in 1944/45, he's the guy who laid it out for the civil servant Monnet to follow

Wed, 03/06/2013 - 18:32 | 3306430 Stock Tips Inve...
Stock Tips Investment's picture

Obviously, the situation in Spain is serious. I do understand that some adjustment is made by lower imports, an increase in unemployment and a reduction in compensation. This, with some variations, has occurred in almost all economic adjustment processes. It is true that it can not devalue its currency, which further complicates the solution. However, for me, the most serious problem is another. Its GDP fell -3.79% in 2009, -0.32% in 2010, -0.42% in 2011 and -0.6 in 2012. Instead, unemployment climbed to 26%. That means that the average productivity of Spanish worker is (or was) very low. Therefore, we reverse that unemployment should cost to this country, many years, lots of money, or a combination of both. Serious, very serious problem.

Wed, 03/06/2013 - 18:32 | 3306434 ebworthen
ebworthen's picture

Unemployed youths and hungry people eventually revolt either with civil unrest that brings the establishemnt to it's knees or with armed revolt that brings the establishment to their maker.

Thu, 03/07/2013 - 04:36 | 3307985 Notarocketscientist
Notarocketscientist's picture

I used to think that but then look at all the poor in places like the Philippines.  They take it like beaten dogs.

Perhaps so will the rest of us when we realize there is nothing that can be done - you riot - they beat you - eventually they break you - and you accept that you will eat dog food (and you'll be lov'in it)

Wed, 03/06/2013 - 18:44 | 3306485 Haager
Haager's picture

There will be no Eurobonds, never
999

(Please, be patient. September. It's election year in Germany).

Wed, 03/06/2013 - 19:06 | 3306579 Dareconomics
Dareconomics's picture

Paraphrasing Kyle Bass, its not the change that is important, but its amplitude. 

dareconomics.com

Wed, 03/06/2013 - 20:43 | 3306906 kalasend
kalasend's picture

So, for Spain, the solution is to quit the Euro and do what ZH hates about the Fed the most, which is to print its own paper?

Am i the only one to think that ZH, despite a lot of posturing, really doesn't (and couldn't) propose any perceivable path to unfuck the status quo?

And that ZH is merely stating his(their) preference of one path to hell over another? 

Wed, 03/06/2013 - 21:11 | 3307027 orez65
orez65's picture

The status quo can not be unfucked.

It's too fucked up.

There is no solution, only a re-solution.

They, and the rest of the world, have to default.

Hyperinflation is the "civilized" way.

Thu, 03/07/2013 - 03:41 | 3307960 Ghordius
Ghordius's picture

+1 - well, it's a guest post - from JPMorgan

nevertheless, generally speaking, in the commentaries, yes. which is hilarious if you think about it, the devaluation of your trade currency means a loss of wages purchasing power in the same way as a direct loss of purchasing power through a decrease of wages

nevertheless the wage deflation path looks more painful, feels more painful

Wed, 03/06/2013 - 22:10 | 3307263 Nobody For President
Nobody For President's picture

Greenie for "unfuck the status quo" 

Thu, 03/07/2013 - 02:09 | 3307872 Dick Darlington
Dick Darlington's picture

Love how these banker boys always end up with the conclusion that fiscal transfer union will save us all. It won't. Transfer union within EZ is like Bankia. Bankia was formed by merging 7 insolvent banks in order to create one big solvent bank. What we really got was even bigger insolvent monster which itself " had to be bailed out". Break up from the €-prison start living within Your means and take the pain. Inside € there's nothing but pain.

Thu, 03/07/2013 - 02:35 | 3307906 dunce
dunce's picture

Part of he problem in spain is a large part of the population suffers serious character flaws as were highlighted when muslims put back pack bombs on the trains and the government folded to their demands. The right thing to do was expel every muslim from the country like they did a few hundred years ago. No country neds muslims, not even one. they could not do that and remain as part of the EU, but that would be the best part.

Thu, 03/07/2013 - 03:14 | 3307938 thisandthat
thisandthat's picture

Your name is appropriate

Thu, 03/07/2013 - 03:01 | 3307927 waterdude
waterdude's picture

ZH still doesn't get it. Primary acct surplus, avg int payments expense DOWN in '12  plus '13 h1 trough for domestic demand.  25% of GDP recap for banking system already in place.  Assets staring to clear nicely with improving intl investor interest.  That's why the IBEX has rallied 50% from July.  ZH will still be telling you to short all the way up to 10,000.  Have fun...

Thu, 03/07/2013 - 06:29 | 3308053 Shevva
Shevva's picture

I'm off to Spain to find a job then as you make it sound like dreamland.

Thu, 03/07/2013 - 07:28 | 3308118 snowman
snowman's picture

The Spain trade narrative is simple.

Imports down because they need less oil/energy to not build empty cities.

Exports up, especially outside EU, in non-labor intensive industries (even agri/horticulture is becoming automated) in rank order of percent increase and value contributing to the export increases:

- petroleum destillates (U.S., Russia)

- pharma (switzerland, Ireland, i.e., re-imports)

- clothing (china and bangladesh...i.e., Spain produces cloth and sends to Asia for sewing)

- Agri (U.S., South America), basically tomatos 

 

Spain is still far behind Germany in price-competitiveness, but has reduced labor costs across the board,even though this has had little impact on export price competitiveness since

labor input is pretty small in the total, which is why Spain can have large unemployment with some non-labor intensive industries doing well on exports. However, their exports

are not structurally sustainable. Petroleum distillates exports spiked with finished gasoline, so this will be a one-off. Pharma is probably the brightest picture, with Almirall and

other companies doing very well exporting high-value pharma. But doesn't require much labor. Clothing is iffy in the long run as cloth manufacturing is being centralized

to locales in South America and the U.S. and some degree Italy. Agri is also iffy unless Spain invests in fully automated horticulture which requires huge capex.

 

 

 

http://www.voxeu.org/article/export-shares-price-competitiveness-and-spa...

Fri, 03/08/2013 - 05:24 | 3311410 waterdude
waterdude's picture

Scorecard: Spain 10year ylds new ytd low today.  "Unsustainable"? Here's where the ZHtinhatpatrol moans about rigged markets: "we're really right, even if all our ideas loose money"!

Do NOT follow this link or you will be banned from the site!